Friday, February 7, 2014

Taking the Sting Out of Surge Pricing

An
Uber Experience

By
Kirsten Snyder - Director, Integrated Insight

With two kids under the age of two, I don’t really get out
much. However, when my husband and I
were invited to the Delta GRAMMY party featuring Lorde, I immediately began to prepare for the
evening. Since the party required us to
drive up to Hollywood from Long Beach during rush hour, we decided to Uber
it. For those of you not familiar with
Uber, it’s an app-based car service with offerings that range from affordable
everyday cars to high-end luxury cars.

When we told people that we took Uber to the party, it
immediately sparked conversation about their controversial pricing model – as
they call it surge
pricing. It is not a new concept –
just a new term for demand based pricing.
If you Google “Uber surge pricing,” you will get a number of articles
arguing both for and against the practice.
Supporters say it is common, and they compare it to airline pricing,
while critics argue it is strictly price gouging.

Uber’s CEO, Travis Kalanick, argues that the objective of surge
pricing is to provide more supply -- higher fares incent drivers to get or stay
on the road -- rather than to strictly maximize revenue. In general, I don’t disagree with the pricing
philosophy, and believe the Uber model provides customers with a more efficient
and reliable service, which is often lacking in the traditional taxi industry. The problem I have with Uber’s model is it
doesn’t allow you to plan your trip based on pricing. Although airfare changes often, once you book
your ticket it doesn’t change, so if you want to fly on the Sunday after
Thanksgiving you know that it will cost 50% more than the next Tuesday. If you are planning to use Uber round trip,
it could cost you $50 on the way there and $150 on the way home, but you won’t
know the return price until you request the car. Even if you wanted to request it in advance,
you can’t. Kalanick’s response to the critics is if you
don’t like the price, then take a taxi. But
how do you know if you like the price
until you actually know the price?

There are a couple relatively simple ways for Uber to offer
surge pricing while developing goodwill with their customers. The simplest solution would be for Uber to offer
a round trip pricing guarantee, where you prepay for your return trip as long
as it happens within the same day or night.
By getting customers to pay for a return trip in advance, Uber can also see
how much demand to expect later that day which could help better align their
supply and pricing.

Uber has created a unique business model that provides a
great service. As they continue to grow,
creating pricing strategies that encourage use and positive word of mouth will
likely improve performance even more.

About Me

Integrated Insight Inc. is a management consulting firm helping organizations out-behave the competition. Through the use of data-driven insights and sophisticated decision analytics, we help companies pinpoint untapped opportunities and ensure long-term, sustainable growth.